Cheat Sheet: Balance Sheet Ratios

Ratios to evaluate credit health and management’s operating capital efficiency.

Interest Coverage Ratios Calculation Healthy

Ratios that specifically measure a business's ability to make interest payments.

EBIT Interest Coverage Earnings Before Interest & Taxes / Interest Expense > 3.0x
EBITDA Interest Coverage Earnings Before Interest, Taxes, Depreciation & Amortization / Interest Expense > 4.0x
EBITDA less CapEx Interest Coverage (EBITDA - 2 Year Average Capital Expenditures) / Interest Expense > 3.0x

Leverage Ratios Calculation Healthy

Ratios that measure the use of debt. High leverage makes good times better and bad times worse.

Debt to Equity (Current Debt + Long Term Debt) / Common Equity < 75%
Debt to Tangible Equity (Current Debt + Long Term Debt) / (Common Equity - Intangible Assets) < 100%
Debt To Total Capital (Current Debt + Long Term Debt) / (Total Debt + Market Capitalization) < 30%
Cash Flow to Total Debt Cash Flow from Operations / Total Debt > 10%
Liabilities to Assets Total Liabilities / Total Assets < 50%

Liquidity Ratios Calculation Healthy

Ratios that measures a business's ability to service its working capital requirements and debt.

Cash Ratio (Cash & Short Term Investments) / Current Liabilities > 0.75x
Quick Ratio (Cash & Short Term Investments + Receivables) / Current Liabilities > 1.0x
Current Ratio Current Assets / Current Liabilities > 1.5x

Asset & Inventory Ratios Calculation Healthy

Ratios that measure efficiency of cash required to maintain inventory.

Asset Turnover Sales / Average Total Assets > 1.0x

Fixed Asset Turnover Sales / Average Net Property, Plant, and Equipment > 2.0x
Inventory Turnover COGS / Average Inventory > 8.0x
Cash Conversion Cycle Days Sales Outstanding + Days Inventory Outstanding - Days Payable Outstanding < 45 days

Supporting Calculations Calculation

Days Sales Outstanding (Average Accounts Receivable / Sales) x 365 < 45 days
Days Inventory Outstanding (Average Inventory / Cost of Sales) x 365 < 45 days
Days Payable Outstanding (Average Accounts Payable / Cost of Sales) x 365 > 45 days

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